Audit Quality and the Shanghai Stock Market Rection to Initial Modified Audit Opinions

Abstract

The objective of this study is to shed light on the role of auditors in an emerging economy and whether the market in China is able to identify quality auditors. To do this, we examine whether audit quality in the Shanghai Stock Exchange affects the positive association between change in earnings per share and cumulative abnormal return (CAR). Regression results using 659 observations for companies listed on the Shanghai Stock Exchange for 1996 and 1997 show that the positive market reaction to increase in earnings is stronger for firms audited by high quality auditors. A broad conclusion of the study is that audit quality is playing an increasingly important role in China and that the market differentiates between high quality versus low quality auditors.

Keywords: Audit quality; Shanghai Stock Exchange; Change in earnings; Market reaction

JEL Classification: M49, M41, G12